Thursday, February 23, 2012

Contraception Insurance Math

By Mike Dorf

Most of the coverage I have seen of the imbroglio over the scope of the religious exception to the contraception insurance mandate has focused on the conflict between interests in health care and religious interests in avoiding contributing money to support acts that individuals and institutions deem immoral. Fair enough. That is indeed the core question. But there is another, more mundane, aspect to the controversy that has me puzzled.

My puzzlement concerns the economic assumptions behind the compromise policy that President Obama has now settled upon. Under this compromise, religiously-affiliated institutions (like Catholic hospitals) that object to paying for employee insurance policies that include contraception coverage will not be required to contribute to the cost of such contraception coverage, but the employees will still be eligible for such coverage from the insurers themselves. According to the White House, insurers will want to cover contraception because doing so saves money in the long run: The costs of health-care for an unintended pregnancy run into the tens of thousands of dollars in obstetrical bills and baby care (assuming that the insured switches to family coverage post-birth), whereas the costs of contraception are much lower.

We can put aside the cost of providing abortions, which are lower than the costs of prenatal care, but which do not figure into the health insurer's calculus because private health insurers are not required to provide abortions. Any employer with a moral objection to providing employees with health insurance options covering contraception will also have a moral objection to providing health insurance covering abortion. Thus, for the insurance company, providing contraception coverage for free is cost-effective if it saves money over prenatal and baby care.

So now we have the following question: Wouldn't any well-run health insurance company offer contraception coverage without a government mandate to do so? Assuming that the underlying economic assumptions are correct, I think the answer to this question has to be yes. And that in turn leads to a further question: So why does the government need to mandate contraception coverage for anyone? I can think of three possibilities.

1) Perhaps many health insurance companies are simply badly run. Some health insurers cover part of the cost of a gym membership for their insureds on the theory that people who exercise regularly have better overall health than people who do not, and therefore covering gym memberships at the front end will lead to lower back-end costs for things like bypass surgery and diabetes care. And yet some but not all health insurance plans cover gym memberships. One could imagine that the economics here are complicated, so that perhaps it's not entirely clear whether it saves the insurer money to cover gym memberships, but if the economic benefits are clear--as the Administration contends they are with respect to contraception versus prenatal + baby care--then a deliberate failure to cover gym memberships--or contraception--would appear to reflect poor administration of the insurance company. We shouldn't rule that out. Insurance companies' coverage decisions are influenced by a great many irrelevant or even perverse factors (including erroneous but persistent conventional wisdom among medical professionals as well as simple inertia), so it's possible that health insurers need to be mandated to do something that will save them money.

2) Another possibility, however, is that insurance companies that do not cover contraception are making decisions based on pressure from employers that don't want to see such coverage. If that's the case here, then the Obama compromise would be better understood as telling the religiously affiliated employers not to block contraception coverage that the insurers really want to provide for free, rather than as telling the religiously affiliated employers to offer plans that cover contraception coverage.

3) Finally, it's possible that the Administration has its numbers wrong. Perhaps the cost of providing contraception coverage is greater than the cost of providing prenatal (and postnatal) care for the women who become unintentionally pregnant (and their fetuses, then babies).

27 comments:

I think (3) is probably true. When a female employee's insurance policy does not cover contraceptives, she will, far more often than not, spend a great deal of her own money to avoid unintentional pregnancy. Witness the recent testimony of Sandra Fluke.

Three is almost certainly correct. As stated in Mike's post (I have not checked Obama's assertion), the question asked is not even.the right question. What difference does it make if contraception is cheaper than pregnancy? What matters is, does the total profit on health insurance increase or decrease if contraception is freely offered? Sam has got to be right, almost everyone that would use contraception will use it without regard to whether it is covered by health insurance. Additionally, the cost to health insurers of pregnancy is likely being overstated. Most people young enough to be conceiving are unlikely to be coming anywhere close to their deductibles.

I agree the Mike's one and two can explain the actions of any large business, but I think in this case Obama probably just has it wrong.

Whoops - meant to say in comment above that I think (b), not (a), incorrect. That is, while Robby George and Sherif Girgis were right about (a), they were wrong about (b), and hence their (c) did not follow. Moreover, that feature of Mandate 1.0 in virtue of which (b) is incorrect is a feature that I think did render Mandate 1.0 objectionable given the lack of material effect, while leaving plenty of imaginable renditions of Mandate 2.0 perfectly fine.

Thanks for this, Mike. My guess, for what it's worth, is that both you and the Dismal Political Economist are right - no version of the madate makes any material difference, and the symbolism's everything. Some conservatives - e.g., Robby George and Sherif Girgis - recently argued, I thought somewhat surprisingly, (a) that both Mandate 1.0 and Mandate 2.0 would have the same material effects and thus, since (b) the material effects are all that are in play here, (c) the latter is as objectionable as the first. I argued that, were (a) correct, this would mean that Mandate 1.0 was unobjectionable, for the material effects are surely nil or next to nil. However, I think (a) incorrect, in that Mandate 1.0 wrought an unnecessary dignitary effect in conscripting religiously affiliated institutions into acting in manners quite transparently contrary to their 'messages.' Hence there are possible renditions of Mandate 2.0 that should (d) allow the administration its symbols at no expense to (e) religiously affiliated institutions' symbols. The full set of back-and-forths is here: http://www.religiousleftlaw.com/2012/02/mandates-moral-agency-and-magisterial-messaging.html

That said, there is a possible 4: namely, insurers don't think that they should cover things that are known and predictable expenditures that are incurred by only a subset of their insurance base. After all, that's not really insuring against risk, but simply a wealth transfer from those who don't use contraception to those who do.

Indeed, in the abstract, if some insurers covered such "risks," I could imagine other insurers competing w/ them by offering plans that didn't. Now, here, I doubt that's what going on, because the costs are probably marginal. But the mentality that insurers should be providing insurance against risks might help explain this.

Btw, I recognize this account is arguably in tension w/ covering things like routine doctor's visits. But there, at least, it's something that everyone probably should be incurring, so it's not really a big deal to "cover" it, since the increase in premiums comes right back in coverage. It's different where the predictable expenditure is incurred only by a subset of the covered population: then it's a wealth transfer rather than a matter of accounting.

"That said, there is a possible 4: namely, insurers don't think that they should cover things that are known and predictable expenditures that are incurred by only a subset of their insurance base. After all, that's not really insuring against risk, but simply a wealth transfer from those who don't use contraception to those who do."

This argument is significantly diminished if insurance companies regularly cover, for example, insulin, which is also a known and predictable expenditure incurred by only a subset of their base. (Not being diabetic, I don't know if they do or not.)

The issue raised by Hashim and addressed by Scott is one that has long interested me: Why do treat any routine, relatively small expenditures as subject to insurance. Nobody in his right mind would buy (or sell) insurance against the risk of, say, needing to buy pencils or stamps. To my mind, there are two possible answers.

1) For some of these expenses, it's in the insurer's interest to pay for the ounce of prevention to avoid paying for the pound of cure. Thus, if the insurer worries that some substantial fraction of insureds won't pay for the preventive medicine/treatment on their own, then even though it's not really "insuring" against any risk, the insurer will want to pay (or have low co-pays and deductibles) on these sorts of items.

2) People have come to see health insurance as a kind of consumer good. Of course the real reason to have health insurance is to insure against catastrophes but most people are lucky enough not to face catastrophes very often and so they imagine that what they get when they get health insurance is a kind of pre-paid meal plan.

I'm betting that both of Mike's countenanced explanations play some role - the first from the supply side, the other from the demand side. And the second can in a sense become 'self-reinforcing' insofar as insurers respond and, in so doing, affect threshold expectations.

"The issue raised by Hashim and addressed by Scott is one that has long interested me: Why do treat any routine, relatively small expenditures as subject to insurance"

is a good one because it goes to the heart of the insurance issue, and the fact that as health insurance has evolved it has evolved away from real insurance. Real insurance works when there is (1) a low probability of an event occurring and (2) the amount of loss resulting from the event is very high. Fire insurance on one's home is a great example where the insurance model works.

Health insurance was originally developed when these were features of medical costs, but that is no longer the situation.

All of this is one reason why the health insurance model and health care payments system we have today does not act as a restraint on costs. The model needs to move away from fee for service, to fixed price of health care services, something that is happening in areas where insurance companies are buying hospitals (Pittsburgh) and where hospital are buying medical practices and offering insurance (Boston).

As a descriptive matter, the data seem to show that non-coverage is common even among non-religiously-affiliated employers, and also show that the coverage saves money for employers.

To me this implies an adverse selection story. Presumably these are benefits that are more attractive to women of child-bearing age. If not all of these new enrollees make consistent use of the benefit, the plan overall has higher costs (i.e., some of these women get pregnant). In other words, offering this coverage in a world where it isn't universal attracts higher-cost insureds. Mandatory coverage for all plans then makes sense as a way of allowing plans to offer coverage that, absent adverse selection, would save them money.

This story also suggests that conscientious opt-outs could put significant cost pressure on non-opt out plans offered by organizations that compete for labor with the "conscientious objector' firms.

As some commenters have already said, it is doubtful that offering contraception coverage reduces the insurer's long-run cost. First, women who really care about not getting pregnant will use contraceptives anyway; it will just cost them more, but still incomparably less than having a child. Second, and probably more important, contraception is as much about timing as about the total number of children. If you create moderate obstacles to obtaining contraceptives, people won't necessarily have more children, they will just have them at less convenient times. Either way, the extra costs are borne by the affected women, their families, their employers, and to some extent the total economy, but not by the insurers.

Additionally, insurers have no guarantee that their policyholders will remain with them, so their incentive to reduce future costs is weak. As far as I know, there is little evidence that preventive care reduces health care costs (a narrower measure than being economically beneficial in terms of higher productivity and less sick time) even in the aggregate, let alone for a single insurer.

I am an actuary and economist, not a lawyer, but I find the Obama compromise constitutionally troubling. It imposes a cost on insurers, which is likely to be passed on to all policyholders. As a result, I will pay a higher premium for the benefit of a religious organization (the beneficiary of the compromise is the employer, not the employee, who was entitled to coverage both under the original rule and under the compromise). As this is a result of a government mandate, I am in effect paying a religious tax. (If the insurers could somehow be prevented from passing the cost to policyholders, then it would be their shareholders paying the tax - same problem.)

It is true that this problem would not exist if contraceptive coverage actually reduced the total cost for the insurer, but, as I said, I don't believe that's true and, in any case, if the government imposes a potential impermissible cost on me, it should have the burden of proof for its claim that my cost is not greater than zero.

You're on a pretty slippery slope agreeing ("fair enough") that the religious objection to such insurance is per se valid. These are not religious institutions (e.g., churches), they are public institutions (e.g., hospitals) owned by religious institutions - just like other institutions are owned by religious people. They provide a secular service, and like the secular institutions with which they compete, they are subject to employment laws of general application: non-discrimination, minimum wage, etc. I doubt you would think the argument for a policy allowing such employers to prohibit their employees from spending their wages on contraception was "fair enough." By their logic, the employer's money is "paying" for contraception in that case just as it is in the case of insurance premiums. Further, the religious objection argument has never prevailed in objectively similar contexts - Quakers still have to pay federal taxes, despite some of "their" money paying for military actions.As to your closing question, I think the answer is a variation on #2 - insurers would make a policy available to employers who want to exclude contraceptive coverage (and maybe even charge more, if the economic argument is correct).

It is precise that this difficulty wouldn't exist World Of Warcraft Gold Buyif contraceptive insurance coverage simply diminished the full cost for the insurer, but, as I said, I never feel that is precise and, in any case, once the federal government imposes a feasible impermissible cost on me, it ought to ownBuy Cheap RS Gold the burden of evidence for its point out that my cost isn't really better than zero.

What matters is, does the total profit on health insurance increase or decrease if contraception is freely offered? Sam has got to be right, almost everyone that would use contraception will use it without regard to whether it is covered by health insurance. Additionally, the cost to health insurers of pregnancy is likely being overstated. Most people young enough to be conceiving are unlikely to be coming anywhere close to their deductibles. buywindows7keys.comWindows 7 professional product KeyWindows 7 ultimate activation Key